Charitable Corporation v Sutton

Facts

• The Charitable Corporation was established to lend money to the poor at lawful interest.
• Directors made improvident loans and failed to supervise the management of funds.
• Large sums were lost through mismanagement and fraud of officers whom the directors failed to oversee.
• The corporation sued the directors for losses sustained through their breach of duty.

Issue

1. What is the nature of the obligation owed by directors to the corporation, and are they liable for losses caused by their failure to supervise?

Held

• The Court held that the directors acted as trustees for the charitable corporation. Having accepted the management of other people's money, they were bound to exercise the same care as a prudent person would exercise over their own affairs. Their failure to supervise and their negligent delegation rendered them personally liable for the resulting losses.

Ratio Decidendi

Directors who undertake the management of corporate property occupy a position analogous to trustees. They are bound to exercise care and diligence in the management of the corporation's affairs. Where they neglect their duties or permit misapplication of funds through want of supervision, they are personally liable for the breach of trust thereby committed. This early formulation establishes the fiduciary foundation upon which modern directors' duties rest.